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What Does the End of the Crude Oil Export Ban Really Mean?

This is the way the crude oil export ban ends, not with a bang but a whimper.

On Thursday, getting in just under the wire for 2015, the first shipment of U.S. sourced crude oil intended for a foreign buyer left port in Corpus Christi carrying oil and condensate destined for Italy. It’s perhaps an inglorious end for a piece of economic policy that very nearly lasted for 40 years in total.

The end of the oil export ban was a chip played in budget negotiations, a concession by Democrats to secure counter-balancing concessions on their own pet causes in the omnibus spending bill. All told, though, there seems to have been relatively little pomp and circumstance for the end of a policy that was at least important enough to stay in place for some four decades.

So, maybe this is a good time to take a look at precisely what that export ban was, why it was there, and what its lifting might mean for the American economy.

Origin Story

The export ban was a part of the Energy Policy and Conservation Act of 1975. The bill was a reaction to the 1973 oil crisis when OPEC had enacted an embargo which quadrupled oil prices as a protest to Western involvement in the 1973 Yom Kippur War. This first “oil shock” contributed to the 1973-4 stock market crash and made it clear that a more carefully planned and managed energy economy was essential to American security and prosperity.

The bill included a number of major policy changes that remain in effect today, including the creation of a strategic oil reserve and fuel economy standards for cars. It also set in motion the export ban that would kick in in 1977, though certain concessions were allowed for specific types of oil, like heavy oil from California or exports to Canada.

Why?

Essentially, it changed the domestic market for oil, protecting us against some of the rockier periods for global oil prices. The United States is the biggest oil producer in the world. By blocking domestic producers from selling their oil abroad, it boosted supply in the American market and helped drive down prices.

It lead to the spread in prices between West Texas Intermediate (WTI) crude, oil from American sources, and Brent Crude, oil from the North Sea that has traditionally been used as a benchmark for global prices. Prices for WTI are typically lower than Brent, peaking out at a $30 per barrel difference in 2011, as American producers had a more limited market to sell in.

And that was precisely what the policy was intended for. Essentially, with American demand far outpacing its supply, and an unhealthy dependence on imports developing, preventing exports helped keep prices for crude (and by extension gasoline) lower at home.

Why End It?

Well, the export ban wasn’t good for oil companies. More options for people to sell oil means getting a better price in the end. This isn’t to say that the Brent-WTI spread is going to disappear entirely. Certainly, the fact that WTI doesn’t have to be transported a great distance to reach the biggest market for oil in the entire world is always going to make it more attractive to keep it stateside where possible. However, it will also put a fairly effective cap on just how large the spread will get in the future as oil companies will clearly sell abroad if they can get a significantly better price for their wares.

That debate has been spurred significantly by the shale revolution of the last decade or so. Oil production has spiked significantly in the United States, making the potential gains for letting producers find new markets were greatly increased. Oil companies are now missing out on a lot of money by having to keep this new boom in production entirely within American borders.

And, before we all rush to label this another boondoggle for big oil, it likely goes a little deeper than that. Smaller producers in the United States are getting hurt by the ban and can frequently struggle to find a market at home. Relieving a domestic supply glut by allowing exports to act as a pressure valve could significantly improve things for these smaller companies and, potentially, the rest of the American economy with them.

What Will This Mean for the Future?

Good question! No one really knows. As with almost every macroeconomic policy shift like this, consensus among economists is largely impossible.

The global energy market is murky one. When you consider the broader oil economy, it’s a massive network of interlocking pieces between producers, transporters, and refiners. There are also a lot of different varieties of crude oil depending on what part of the world they’re coming from.

Taken altogether, that makes it next to impossible to predict what sort of results this will create in prices, be that oil or gasoline, home or abroad. It isn’t as simple a supply and demand equation as it might immediately seem, so whether or not American consumers will face higher prices at the pump as a result of this isn’t a question that will have a clear answer for years.

What is for sure is that this is good for American oil companies, large and small, improving economic growth overall. It’s also likely to increase global carbon emissions, though it’s probably not possible to accurately project just how much.

And there’s also the argument that, for all that may change, almost everything will stay pretty much the same.

For starters, the term “ban” doesn’t really leave room for the sort of nuance that actually exists on the ground. The United States does export nearly a half million barrels of crude oil a day, mostly accounted for by exports to Canada and from Alaska (both of which are given exceptions). What’s more, the ban didn’t extend to refined gasoline or diesel fuel, so producers had some options in simply refining their product prior to sending it overseas.

At the very least, the export ban may have outlived its use, hindering oil companies a lot more than it was helping consumers. As is almost always the case, an economic policy created to deal with the realities of 40 years ago is likely going to need some adjustment. Even if the results of lifting this ban aren’t ideal in the end, crafting new policies that are better suited for present realities is likely a better option than simply holding onto the past.

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